When does the "long run" arrive?
Whenever you read about value investing, you hear that although stock prices bounce around, up and down, in the short term, in the "long run," value the market recognizes value. I don't know about you, but haven't noticed that any stock's price ever stops bouncing around from day to day. Only when trading stops.
Doesn't matter whether it's General Electric or Coca-Cola, which have been trading for over 100 years, or the latest IPO -- the stock's price bounces up and down throughout every trading day.
So, just when is the "long run?" Both stocks have been doing well now for several decades, but both companies went through periods when they didn't look so hot, and their stock prices suffered. Yet those bad periods were still 60 years or more after their IPOs. So were they still not in the "long run?"
It's clear to me that there can be no one, set, truly "correct" price for any company's stock, because during active trading that is going to bounce around constantly due to the flow of sell and buy orders, by the constant battle between bulls and bears, supply and demand. And in the larger picture, that ebb and flow will often produce an up and down trend line.
Did the people who bought General Electric when it was doing a lot worse than now somehow know that Jack Welch would become its CEO? Or did they just figure that GE would somehow attract, find and hire the right person?
With the great increase in interest in the investing culture in investing for capital gains in the past 40 to 50 years, you'd think that somebody pay attention to how ephemeral capital gains actually are, with the vast swings in price. What goes up today can go down tomorrow. What gains are actually permanent? Some price gains are most likely permanent, but nobody knows when that point is reached. Bear markets have in the past taken even good companies down to prices their stocks hadn't seen in many years. And that's just counting the ones that stay in business!
stocks long run
stocks long run
Monday, April 30, 2007
Sunday, April 29, 2007
Investing and Social Security
On Monday, April 23 the Social Security fund trustees reported on the state of the trust fund. It's not pretty. It's one reasons for anybody facing retirement in the next 40 years to save up our own money and not rely on picking the pockets of the younger generation.
It's a prescription for both class and generational warfare.
Unfortunately, politicians have not gotten across the message to the general public that they should not be counting on Social Security for their retirement under it's current setup. You should hedge your retirement investments so that you don't have to count on either Social Security or selling off the stocks and mutual funds you're now accumulating. You should consider selling off all non-dividend paying stocks and paying stocks and bonds that do pay you interest, and hanging on to them -- forever.
Or you risk selling them without having to pay capital gains tax in the future -- because you're selling them at a loss!
Most people don't realize this is related to money, but you should also protect your health also. Quit smoking. Quit drinking to excess. Go on the Zone diet. Get regular moderate exercise. Take nutritional supplements. Don't go on prescription drugs.
The healthier you are, the longer you're able to keep working, which is going to be important to your financial health. Plus, of course, it should be obvious that the healthier you are, the more you'll enjoy all of your life.
The Medicare Part A trust fund is going to start paying out more than it takes in this year -- 2007. It's going broke faster than the regular RSDI Social Security trust fund. Do what you can to stay out of the hospital because you're going to have to pay more and more of it yourself.
investing and Social Security
investing and Social Security
It's a prescription for both class and generational warfare.
Unfortunately, politicians have not gotten across the message to the general public that they should not be counting on Social Security for their retirement under it's current setup. You should hedge your retirement investments so that you don't have to count on either Social Security or selling off the stocks and mutual funds you're now accumulating. You should consider selling off all non-dividend paying stocks and paying stocks and bonds that do pay you interest, and hanging on to them -- forever.
Or you risk selling them without having to pay capital gains tax in the future -- because you're selling them at a loss!
Most people don't realize this is related to money, but you should also protect your health also. Quit smoking. Quit drinking to excess. Go on the Zone diet. Get regular moderate exercise. Take nutritional supplements. Don't go on prescription drugs.
The healthier you are, the longer you're able to keep working, which is going to be important to your financial health. Plus, of course, it should be obvious that the healthier you are, the more you'll enjoy all of your life.
The Medicare Part A trust fund is going to start paying out more than it takes in this year -- 2007. It's going broke faster than the regular RSDI Social Security trust fund. Do what you can to stay out of the hospital because you're going to have to pay more and more of it yourself.
investing and Social Security
investing and Social Security
Friday, April 27, 2007
Dow 13,000 Lucky?
So the Dow Jones Industrial Average has finally reached 13,000. Hip, hip, hoorah!
Myself, I'm of two minds. As a signifying of the national mood, especially the mood of those who have a lot of money, it's a good sign. It seems to show that despite the various economic worries that we have (the War on Terrorism, the decline of the dollar, the rising price of oil, the growing trade deficit, the rise of subprime mortgages, the overall huge consumer debt, the huge business debt etc etc etc), the smart people with lots of money think we'll over the problems.
On the other hand, I think more logically than most people. Warren Buffett is the only other investment writer I know of to point out that stock buyers should want the price of the stocks they are buying to remain low. Really, if you're buying some stock or stocks on a regular basis to save for your retirement, you ideally want the prices to remain low -- until you sell them.
That's because the lower the price of the stock, the more shares you can buy with the money you have.
Let's say you're spending $100 a month to buy a company's stock, and right now the market price is $25. You can buy 4 shares. Let's say that by next month the price has doubled to $50. Yes, you feel good because the value of the shares you've already bought has doubled -- but now your $100 can buy only 2 new shares instead of 4.
For accumulating stock, you want the price to remain low.
But few people look at it that way -- they'd rather be happy that the shares they already own have doubled in value, although they can't do anything with them.
Dow 13000
Dow 13000
Myself, I'm of two minds. As a signifying of the national mood, especially the mood of those who have a lot of money, it's a good sign. It seems to show that despite the various economic worries that we have (the War on Terrorism, the decline of the dollar, the rising price of oil, the growing trade deficit, the rise of subprime mortgages, the overall huge consumer debt, the huge business debt etc etc etc), the smart people with lots of money think we'll over the problems.
On the other hand, I think more logically than most people. Warren Buffett is the only other investment writer I know of to point out that stock buyers should want the price of the stocks they are buying to remain low. Really, if you're buying some stock or stocks on a regular basis to save for your retirement, you ideally want the prices to remain low -- until you sell them.
That's because the lower the price of the stock, the more shares you can buy with the money you have.
Let's say you're spending $100 a month to buy a company's stock, and right now the market price is $25. You can buy 4 shares. Let's say that by next month the price has doubled to $50. Yes, you feel good because the value of the shares you've already bought has doubled -- but now your $100 can buy only 2 new shares instead of 4.
For accumulating stock, you want the price to remain low.
But few people look at it that way -- they'd rather be happy that the shares they already own have doubled in value, although they can't do anything with them.
Dow 13000
Dow 13000
Wednesday, April 25, 2007
Value and Growth Funds Blurring
The latest issue so BARRON'S has an interesting article on the blurring of the line between growth and value investing mutual funds.
Seems that, because value funds have been doing so well ever since the infamous dotcom boom busted, many "growth" fund managers have been buying value stocks. Well, fair's fair, since during the late 1990s, many "value" fund managers bought into technology, just in time to experience the bust.
This illustrates another reason to avoid mutual funds if possible -- you can't depend on them to buy the kinds of investments they claim to specialize in.
It's also interesting that, according to this article, the line between value and growth investing is blurring. Value and growth managers are loading up on the same companies.
In theory, this could be the best of both worlds -- underpriced stocks that are growing faster than the market. Actually, the article doesn't describe the situation and is a little unclear, except to say that some stocks that were formerly growth favorites -- specifically, Wal-Mart, Microsoft and Dell -- have gotten so big that they can't deliver 20% a year growth any longer.
Personally, when it comes to growth I believe that Dr. Jeremy Siegel has the right idea -- it's a trap. Your returns are lower than you think they'll be because you pay too high a price.
When it comes to value, you may do well if the stock pays dividends, since you're presumably getting a good stream of income for a low price. If there're no dividends, you're engaging in a crap shoot. You may find a future. You may lose your money.
growth and value investing blurring
growth and value investing blurring
Seems that, because value funds have been doing so well ever since the infamous dotcom boom busted, many "growth" fund managers have been buying value stocks. Well, fair's fair, since during the late 1990s, many "value" fund managers bought into technology, just in time to experience the bust.
This illustrates another reason to avoid mutual funds if possible -- you can't depend on them to buy the kinds of investments they claim to specialize in.
It's also interesting that, according to this article, the line between value and growth investing is blurring. Value and growth managers are loading up on the same companies.
In theory, this could be the best of both worlds -- underpriced stocks that are growing faster than the market. Actually, the article doesn't describe the situation and is a little unclear, except to say that some stocks that were formerly growth favorites -- specifically, Wal-Mart, Microsoft and Dell -- have gotten so big that they can't deliver 20% a year growth any longer.
Personally, when it comes to growth I believe that Dr. Jeremy Siegel has the right idea -- it's a trap. Your returns are lower than you think they'll be because you pay too high a price.
When it comes to value, you may do well if the stock pays dividends, since you're presumably getting a good stream of income for a low price. If there're no dividends, you're engaging in a crap shoot. You may find a future. You may lose your money.
growth and value investing blurring
growth and value investing blurring
The Sharpe Ratio is not a constant
Recently I read THE 25% CASH MACHINE by Bryan Perry, which described ways to invest for income that most people have never heard of: real estate investment trusts (REITs), Canadian business trusts, Canadian royalty trust, business development corporations, closed end mutual funds (I'm not sure why this is a classification by itself, since the profitability or income yield of any given closed end fund is going to depend on what the fund invests in and how well it's making money, not on being a closed end fund per se), profitable sectors (now likes shipping of oil and bulk materials) and master limited partnerships.
One reader gave feedback on Amazon about how this book should come with a warning label, since it's established financial theory that to get more income you must take on more risk, so anything that pays so much income must have high risk -- Q.E.D.
I'm not defending the book itself -- I thought it described most of those things much too sketchily. I still have many more questions than answers, especially for the more exotic stuff. REITs are well-established and gaining accepting an investments. Besides, you can buy books that do a good job of explaining them. The same is not true of Canadian business trusts, royalty income trusts, business development corporations and master limited partnerships.
But the concepts do seem legitimate. I haven't done all the research I would have to do before investing my money, but I'm not writing them off just because their pay a lot of money.
After all, if every investment gave off the same amount of income given the same degree of risk, every investment would have the same Sharpe ratio and that would be a useless figure, because constant throughout the investment world, and that's just not true.
Isn't it possible some of these investments have high yields because so few investors know about them?
risk and yield
risk and yield
One reader gave feedback on Amazon about how this book should come with a warning label, since it's established financial theory that to get more income you must take on more risk, so anything that pays so much income must have high risk -- Q.E.D.
I'm not defending the book itself -- I thought it described most of those things much too sketchily. I still have many more questions than answers, especially for the more exotic stuff. REITs are well-established and gaining accepting an investments. Besides, you can buy books that do a good job of explaining them. The same is not true of Canadian business trusts, royalty income trusts, business development corporations and master limited partnerships.
But the concepts do seem legitimate. I haven't done all the research I would have to do before investing my money, but I'm not writing them off just because their pay a lot of money.
After all, if every investment gave off the same amount of income given the same degree of risk, every investment would have the same Sharpe ratio and that would be a useless figure, because constant throughout the investment world, and that's just not true.
Isn't it possible some of these investments have high yields because so few investors know about them?
risk and yield
risk and yield
Tuesday, April 24, 2007
Falling into the growth trap
The more I read books advising investors to do the opposite, the more I think that what Dr. Jeremy Siegel described in THE FUTURE FOR INVESTORS as The Growth Trap. That is, because of the promise of greater growth, investors overpay, and therefore getting lesser returns than investors who put their money in relatively cheaper investments. And this is true even if the growth story holds up (which of course it often doesn't, especially in the long run). And this is especially true of investors who are reinvesting dividends along the way, because each time they buy new shares of stock with their dividends, they are getting fewer shares of the growth stock than investors do of the nongrowth stock.
So over time, investors in the more boring stock acquire more and more shares of it, and therefore in the long run are paid more and more in dividends.
This finding is being generally overlooked, since it's counter-intuitive and certainly unsexy. And also goes against the advice of numerous books on investing.
I'm reading a book on REITs and the author writes about how there's a trade-off between REITs that pay higher dividends now and those that retain more of their earnings for future growth. That future growth may or may not come to pass, and REITs should retain enough cash to stay in business, but generally it's therefore better to go with REITs that pay the higher dividends now (as long as they're paying it out of current earnings. If they're dipping into saved cash that's a bad sign.)
Growth Trap
Growth Trap
So over time, investors in the more boring stock acquire more and more shares of it, and therefore in the long run are paid more and more in dividends.
This finding is being generally overlooked, since it's counter-intuitive and certainly unsexy. And also goes against the advice of numerous books on investing.
I'm reading a book on REITs and the author writes about how there's a trade-off between REITs that pay higher dividends now and those that retain more of their earnings for future growth. That future growth may or may not come to pass, and REITs should retain enough cash to stay in business, but generally it's therefore better to go with REITs that pay the higher dividends now (as long as they're paying it out of current earnings. If they're dipping into saved cash that's a bad sign.)
Growth Trap
Growth Trap
Monday, April 23, 2007
Latest issue of Barrons
I bought BARRONS yesterday for the first time in ages. It's good to see that Alan Abelson is still going strong, making sarcastic comments in relation to Richard Gere getting burned in effigy for kissing an Indian Bollywood film actress (seems to me that somebody who's so public with his conversion to Buddhism should know better than to kiss an Indian woman in public) and predicting disaster for the stock market even as this issue is predicting the Dow at 13000 soon (probably this week). Plus, there was a column about problems at Fidelity Mutual Funds, which apparently are not delivering the performance they used to do (I'm not a fan of open ended mutual funds) so they're investing more money into research, which is probably useless, and why I'd rather go with Vanguard if I were to put money into an open ended mutual fund -- fewer expenses. They run an annual stock picking contest for students and professors and described this year's winners, though I forget whether they used leverage to make their stock picks, but they were allowed to sell short. And one guy had a big winner by buying a subprime lender than was down way below its book value.
leveraging Barrons
leveraging Barrons
leveraging Barrons
leveraging Barrons
Sunday, April 22, 2007
How much time to research investing?
Another way, rarely talked about directly, in which time and investing interact, is simply how much time investors put into their investing.
A large number of the investing books I've read advise readers to continue their education, to stay up on the state of the national and world economy, the leading indicators, to keep reading more and more books on investing, to frequent online investing forums, to read the blogs, the sites and on and on.
If you had the time, you could make learning about investing and the current state of the markets a fulltime job. Heck, it could occupy you 24/7.
If you spare all your time reading annual reports, yet another book about Japanese candlesticks technical analysis and on and on, will you make more money than someone who simply sends a portion of every paycheck into an S & P 500 index fund?
Chances are, you'll make less, because you might feel obligated to actually act on some of the information you're reading, and that will reduce your investing total yield.
And even if you get a little return, long-term, I have to step back and apply a tool of economics -- opportunity cost.
Maybe you would make even more money if you took all that time and energy and money (books and software cost money) you're spending on your investment research, and applied it to a part time business you'd make even more money. Or even if you just worked a part time job instead, you'd probably make more money, which you could then also throw into that S&P 500 Index fund and so make even more money.
investing research
investing research
A large number of the investing books I've read advise readers to continue their education, to stay up on the state of the national and world economy, the leading indicators, to keep reading more and more books on investing, to frequent online investing forums, to read the blogs, the sites and on and on.
If you had the time, you could make learning about investing and the current state of the markets a fulltime job. Heck, it could occupy you 24/7.
If you spare all your time reading annual reports, yet another book about Japanese candlesticks technical analysis and on and on, will you make more money than someone who simply sends a portion of every paycheck into an S & P 500 index fund?
Chances are, you'll make less, because you might feel obligated to actually act on some of the information you're reading, and that will reduce your investing total yield.
And even if you get a little return, long-term, I have to step back and apply a tool of economics -- opportunity cost.
Maybe you would make even more money if you took all that time and energy and money (books and software cost money) you're spending on your investment research, and applied it to a part time business you'd make even more money. Or even if you just worked a part time job instead, you'd probably make more money, which you could then also throw into that S&P 500 Index fund and so make even more money.
investing research
investing research
Thursday, April 19, 2007
How much time to invest?
How much time do you have to invest?
That's a very important question for two reasons.
First, because the more time you have, the more you can and should let your earnings compound -- which will give you more money in the long run.
Secondly, because you may have either a lot more or a lot less time than you think, and how you perceive time is more important than actual time.
Here's what I mean -- Based on the first rule, it's obvious that young people should be investing as much money as they can. They have the most actual time to invest.
But most young people don't reach that conclusion. They perceive that because they have a long time before retirement, they can wait to save. I've tried to point out to young people in their 20s what I wish I'd known -- and they just argue with me about how they don't have enough money to save. But they have enough money to buy beer. That immediate sensation is more important to them the long term benefit of investing now.
I know that when they're my age, they're going to look back and be sorry, but they don't perceive that now.
Also, most older people have more time than they usually think. Life expectancies are increasing, and so about 1% of people aged 65 will live to 100. That's 35 years they have. True, 99% will not reach that, but how many know whether they'll be in the 1%. What if they spend all their money before they die?
Also, as medical science advances, life expectancies will continue to increase. Thirty-five years from now, living to 100 may not be exceptional at all. The longer you live, the longer you probably will live.
So most older people think they have less time than they actually do.
Of course, unfortunately, some of us will die a lot younger than we expect or plan for. But that can't be known or predicted, so we should plan for a long life.
This is all important when deciding what to invest in, because all investments are a trade-off between more money now and more money in the future.
investing lengths
investing lengths
That's a very important question for two reasons.
First, because the more time you have, the more you can and should let your earnings compound -- which will give you more money in the long run.
Secondly, because you may have either a lot more or a lot less time than you think, and how you perceive time is more important than actual time.
Here's what I mean -- Based on the first rule, it's obvious that young people should be investing as much money as they can. They have the most actual time to invest.
But most young people don't reach that conclusion. They perceive that because they have a long time before retirement, they can wait to save. I've tried to point out to young people in their 20s what I wish I'd known -- and they just argue with me about how they don't have enough money to save. But they have enough money to buy beer. That immediate sensation is more important to them the long term benefit of investing now.
I know that when they're my age, they're going to look back and be sorry, but they don't perceive that now.
Also, most older people have more time than they usually think. Life expectancies are increasing, and so about 1% of people aged 65 will live to 100. That's 35 years they have. True, 99% will not reach that, but how many know whether they'll be in the 1%. What if they spend all their money before they die?
Also, as medical science advances, life expectancies will continue to increase. Thirty-five years from now, living to 100 may not be exceptional at all. The longer you live, the longer you probably will live.
So most older people think they have less time than they actually do.
Of course, unfortunately, some of us will die a lot younger than we expect or plan for. But that can't be known or predicted, so we should plan for a long life.
This is all important when deciding what to invest in, because all investments are a trade-off between more money now and more money in the future.
investing lengths
investing lengths
Wednesday, April 18, 2007
Investing risk of debt and inflation
Are we going to have a replay of 1970s-style stagflation? Advisor Stephen Leeb thinks so, according to a recent email I got from him.
For those of you who don't remember, during much of the 1970s the econony did something it's not supposed to -- it had high inflation and high unemployment at the same time. The stock market basically went nowhere. Commodities and real estate greatly rose in price. The whole "get rich quick in real estate" concept began during that period. All but the youngest real estate gurus got their start during that decade.
But personally I think the investing risk of stagflation is low. A lot of those problems are traceable back to the coming of age of the baby boomers. A whole lot of 20 somethings looking for work. That created the high unemployment rate.
I am not going to argue with Mr. Leeb, however, that inflation remains a threat. The decline of the dollar and the rise in the price of oil are both problems for American residents.
Also, I highly agree that there's way too much debt for the good of the American and world economy. Federal government debt could be lower, but business and personal debt is a lot higher.
In case you're wondering, Mr. Leeb believes that the market is going up in the short run. He says the smart money, including Warren Buffett, is buying.
Of course, it's always smart to buy good companies with a long record of paying dividends.
investing risk
investing risk
For those of you who don't remember, during much of the 1970s the econony did something it's not supposed to -- it had high inflation and high unemployment at the same time. The stock market basically went nowhere. Commodities and real estate greatly rose in price. The whole "get rich quick in real estate" concept began during that period. All but the youngest real estate gurus got their start during that decade.
But personally I think the investing risk of stagflation is low. A lot of those problems are traceable back to the coming of age of the baby boomers. A whole lot of 20 somethings looking for work. That created the high unemployment rate.
I am not going to argue with Mr. Leeb, however, that inflation remains a threat. The decline of the dollar and the rise in the price of oil are both problems for American residents.
Also, I highly agree that there's way too much debt for the good of the American and world economy. Federal government debt could be lower, but business and personal debt is a lot higher.
In case you're wondering, Mr. Leeb believes that the market is going up in the short run. He says the smart money, including Warren Buffett, is buying.
Of course, it's always smart to buy good companies with a long record of paying dividends.
investing risk
investing risk
Tuesday, April 17, 2007
Currency diversification
I think one of the most difficult aspects of the current monetary system and economics -- and how it affects investing -- is the relativity of the value of currency in relation to other currencies.
You can make 5% on your US dollar investment but still losing spending power because the yen goes up against the US dollar.
In the past, this has not been particularly important for US residents getting a US dollar income. Everything we bought was priced in dollars. We might notice Toyota prices going up and down, but overall, it didn't make any difference unless and until you travelled overseas.
Yet as the world's economies adapt and change, we will all be affected by the relative strength of our own national (or multi-national, in the case of the euro) currencies.
Therefore, everybody should have some source of income from other currencies, and therefore should consider making good investments outside their own country.
Some people in the US advise simply investing in major US corporations that do a lot of business around the globe (Coke is the most recognized brand name in the world. They even have a flair for designing how the name looks in other alphabets -- the Coke logo in Thai looks more impressive than the English version.) And this makes a lot of sense.
However, I favor diversifying your investments in different currencies -- NOT trying to make money from trading the foreign exchange markets (that's madness for a normal person), but simply from hedging your sources of investment income. At a minimum, try to have some Japanese yen, US dollars and euros. Also, British pounds, Australian and Canadian dollars.
foreign exchange investing
foreign exchange investing
You can make 5% on your US dollar investment but still losing spending power because the yen goes up against the US dollar.
In the past, this has not been particularly important for US residents getting a US dollar income. Everything we bought was priced in dollars. We might notice Toyota prices going up and down, but overall, it didn't make any difference unless and until you travelled overseas.
Yet as the world's economies adapt and change, we will all be affected by the relative strength of our own national (or multi-national, in the case of the euro) currencies.
Therefore, everybody should have some source of income from other currencies, and therefore should consider making good investments outside their own country.
Some people in the US advise simply investing in major US corporations that do a lot of business around the globe (Coke is the most recognized brand name in the world. They even have a flair for designing how the name looks in other alphabets -- the Coke logo in Thai looks more impressive than the English version.) And this makes a lot of sense.
However, I favor diversifying your investments in different currencies -- NOT trying to make money from trading the foreign exchange markets (that's madness for a normal person), but simply from hedging your sources of investment income. At a minimum, try to have some Japanese yen, US dollars and euros. Also, British pounds, Australian and Canadian dollars.
foreign exchange investing
foreign exchange investing
Monday, April 16, 2007
Investing in consumer (bad health) companies
Yesterday's post made me think about how the same principle holds true for many of the companies that are high, dependable dividend payers, which is the kind I'm interested in, since I don't want to put my money in fixed investments that are eroded by inflation.
Many of the good dividend payers are companies that sell low-cost consumables -- especially snack food. Hershey, Wrigley, McDonalds and so on. Or Philip Morris (now Altria) which sell cigarettes, which is the ultimate bad health type of consumer stock. When I buy those companies am I responsible for the poor health of the people who eat too many of their products? I don't think so -- even of tobacco companies, as politically incorrect as it is to say so. I've never been a smoker, don't want to be a smoker, hate tobacco smoke, don't like to be around it, and I'm glad for reasonable restrictions on it inside public buildings -- though I've come to hate the fascist reminders in airports about not smoking.
Yet nobody forces anybody to go to McDonalds, eat a chocolate bar or even to smoke a cigarette. When I was a teenager I chose not to smoke, and I've kept up that choice through my adult years. And the information about the health problems associated with smoking have only increased since I was a teenager. So anybody who's a smoking teenager or young adult now is smoking despite 100 times more knowledge of its negative health effects than I had.
So why not buy the stocks of these companies and collect the dividends?
consumer investing
consumer investing
Many of the good dividend payers are companies that sell low-cost consumables -- especially snack food. Hershey, Wrigley, McDonalds and so on. Or Philip Morris (now Altria) which sell cigarettes, which is the ultimate bad health type of consumer stock. When I buy those companies am I responsible for the poor health of the people who eat too many of their products? I don't think so -- even of tobacco companies, as politically incorrect as it is to say so. I've never been a smoker, don't want to be a smoker, hate tobacco smoke, don't like to be around it, and I'm glad for reasonable restrictions on it inside public buildings -- though I've come to hate the fascist reminders in airports about not smoking.
Yet nobody forces anybody to go to McDonalds, eat a chocolate bar or even to smoke a cigarette. When I was a teenager I chose not to smoke, and I've kept up that choice through my adult years. And the information about the health problems associated with smoking have only increased since I was a teenager. So anybody who's a smoking teenager or young adult now is smoking despite 100 times more knowledge of its negative health effects than I had.
So why not buy the stocks of these companies and collect the dividends?
consumer investing
consumer investing
Sunday, April 15, 2007
Drugs and drug stocks
Invest in drug stocks but avoid their products -- you'll be wealthier and healthier.
I can understand how people get into social investing, though I haven't since my days as a radical. As someone who's long been interested in natural health, vitamins and so on, I feel a conflict when it comes to investing in drug stocks.
Oh, it's not like I believe companies such as Merck are frauds such as the infamous prime bank scam -- I just think that in a perfect world, we'd all be in better health if we first of all took good nutrition, herbs and other supplements. Plus exercised and did other things that enhance good health.
It's not just a matter of avoiding the need for drugs by staying healthy (although that's important), it's that I believe that most prescription drugs are downright unhealthy -- or, at the very least, an unpleasant trade off between benefit and risk, which is probably unnecessary if the patient would take the right nutrition or get the right exercise.
Yet there's no doubt that drug companies are good investments. As baby boomers grow olders, they're going to take a lot more prescription drugs (I'll stay away from jokes about non-prescription drugs).
investing in drug stocks
investing in drug stocks
I can understand how people get into social investing, though I haven't since my days as a radical. As someone who's long been interested in natural health, vitamins and so on, I feel a conflict when it comes to investing in drug stocks.
Oh, it's not like I believe companies such as Merck are frauds such as the infamous prime bank scam -- I just think that in a perfect world, we'd all be in better health if we first of all took good nutrition, herbs and other supplements. Plus exercised and did other things that enhance good health.
It's not just a matter of avoiding the need for drugs by staying healthy (although that's important), it's that I believe that most prescription drugs are downright unhealthy -- or, at the very least, an unpleasant trade off between benefit and risk, which is probably unnecessary if the patient would take the right nutrition or get the right exercise.
Yet there's no doubt that drug companies are good investments. As baby boomers grow olders, they're going to take a lot more prescription drugs (I'll stay away from jokes about non-prescription drugs).
investing in drug stocks
investing in drug stocks
Saturday, April 14, 2007
International investing + global warming
How will global warming affect income investing?
I'd rather write -- how will the global warming controversy affect income investing?
I don't know whether the planet is getting any warmer or not. After all, local weather varies tremendously for a huge variety of reasons. We now have ways of collecting data from around the world, satellites, etc which we didn't have until recently. When we compare current temperatures to past records, we're not making a fair comparison.
And if it the planet is warming, is human activity the cause? Long before the industrial revolution began, the world was hotter . . . and colder. The amount of light and heat the sun radiates can vary by up to 30%, yet I rarely hear this mentioned, and I've heard that the recent UN study on global warming did not even include that in its model.
If the planet is warming, no matter what the cause, what can we do about it? I'm against proposed solutions that would give government control over people, yet authitarian socialism seems to be the goal of many environmental activists. I believe that if there is a real problem, we need to use our ingenuity and technology to solve it, without condemning the masses of people of the Earth to poverty.
I do think that the issue makes international investing even more important. You can't afford to keep all of your money tied up with the political and economic fortunes of any one country, even the United States.
It appears that there will be a lot of economic activity related to global warming. And I can't really be against the reduction of fossil fuel emissions. Burning fossil fuels is wasteful of fossil fuels. Plus it creates some pollution, which I'm happy to reduce.
So hopefully the controversy will encourage the development of alternative energy sources and ways of cleaning up pollution . . . without discouraging the continued wealth creation of global capitalism.
global warming pollution
global warming pollution
I'd rather write -- how will the global warming controversy affect income investing?
I don't know whether the planet is getting any warmer or not. After all, local weather varies tremendously for a huge variety of reasons. We now have ways of collecting data from around the world, satellites, etc which we didn't have until recently. When we compare current temperatures to past records, we're not making a fair comparison.
And if it the planet is warming, is human activity the cause? Long before the industrial revolution began, the world was hotter . . . and colder. The amount of light and heat the sun radiates can vary by up to 30%, yet I rarely hear this mentioned, and I've heard that the recent UN study on global warming did not even include that in its model.
If the planet is warming, no matter what the cause, what can we do about it? I'm against proposed solutions that would give government control over people, yet authitarian socialism seems to be the goal of many environmental activists. I believe that if there is a real problem, we need to use our ingenuity and technology to solve it, without condemning the masses of people of the Earth to poverty.
I do think that the issue makes international investing even more important. You can't afford to keep all of your money tied up with the political and economic fortunes of any one country, even the United States.
It appears that there will be a lot of economic activity related to global warming. And I can't really be against the reduction of fossil fuel emissions. Burning fossil fuels is wasteful of fossil fuels. Plus it creates some pollution, which I'm happy to reduce.
So hopefully the controversy will encourage the development of alternative energy sources and ways of cleaning up pollution . . . without discouraging the continued wealth creation of global capitalism.
global warming pollution
global warming pollution
Friday, April 13, 2007
How low can stocks go?
Is there a floor on the stock market and, if so, where is it?
A lot of times when you read about individual stocks and the stock market, the writer or commentator talks about price rises as though they're permanent.
"If you didn't buy XYZ at $20, you've lost out on its rise to $50." Maybe. Or maybe it will go to $10 by next year. Or $1.
People commenting on Alan Abelson of BARRON'S often sound like that, because he's a chronic bear. "He would have had us miss all market gains since the Dow was 3200," one woman wrote in. In their book RULE BREAKERS, RULE MAKERS, The Motley Fool also go after Abelson.
Now in 2007 we can see perhaps some truth on both sides. The late 1990s were an unsustainable boom which did bust. Starting in March 2000, The price of many dot.com stocks plummetted from hundreds of dollars to pennies. High tech companies that made a profit, such as Microsoft, saw their share prices dramatically reduced. The overall market went down, although not by as much.
However, bad as the early 2000s bear market was, it wasn't as bad as some of Abelson's predictions. People who bought stocks at a price below their bear market lows, remained "in profit" -- at least without adjusting for inflation.
Is that a guarantee that the market or individual stocks will never go below the early 2000s bear market lows?
No. The Dow is now about 12,500. Maybe it will go back 777 where it was in 1982. Maybe below that, wiping out all price gains made in this long term bull market.
Maybe it will never go below 12,500 again.
Nobody knows.
And that's my point. It's easy to point to stock charts from the past, compare them with today's prices and then draw conclusions. But nobody knows where those prices are going tomorrow or in the next 5 or 10 or 30 years.
It's not likely the Dow will ever go back to 777 -- but I wouldn't risk my life on it, especially not with terrorism, looming conflict with China, and such threats. The U.S. has survived past threats -- that's no guarantee of the future.
Advocates of "value investing" often speak of how stocks can be undervalued now but the market will reward good companies in the "long run." I've got news for you -- there is no "long run." Stock prices are ALWAYS fluctuating.
Many companies traded on the New York Stock Exchange are more than 30 years old. Their prices continue to fluctuate based on the market's current appraisal of their value. 30 years from now, the stock prices of all then-existing companies will also fluctuate based on the market's then-current appraisal of their value.
And those 30 years from now prices could be considered "over" or "under" valued at the time, depending on how you choose to value a stock.
And those 30 years from now prices could be higher but also lower than today's closing price -- without or without adjusting for inflation (which is important, but it's easy to forget about this when oohing and ahhing about how much a stock has gone up over the years.)
stock price lows
stock price lows
A lot of times when you read about individual stocks and the stock market, the writer or commentator talks about price rises as though they're permanent.
"If you didn't buy XYZ at $20, you've lost out on its rise to $50." Maybe. Or maybe it will go to $10 by next year. Or $1.
People commenting on Alan Abelson of BARRON'S often sound like that, because he's a chronic bear. "He would have had us miss all market gains since the Dow was 3200," one woman wrote in. In their book RULE BREAKERS, RULE MAKERS, The Motley Fool also go after Abelson.
Now in 2007 we can see perhaps some truth on both sides. The late 1990s were an unsustainable boom which did bust. Starting in March 2000, The price of many dot.com stocks plummetted from hundreds of dollars to pennies. High tech companies that made a profit, such as Microsoft, saw their share prices dramatically reduced. The overall market went down, although not by as much.
However, bad as the early 2000s bear market was, it wasn't as bad as some of Abelson's predictions. People who bought stocks at a price below their bear market lows, remained "in profit" -- at least without adjusting for inflation.
Is that a guarantee that the market or individual stocks will never go below the early 2000s bear market lows?
No. The Dow is now about 12,500. Maybe it will go back 777 where it was in 1982. Maybe below that, wiping out all price gains made in this long term bull market.
Maybe it will never go below 12,500 again.
Nobody knows.
And that's my point. It's easy to point to stock charts from the past, compare them with today's prices and then draw conclusions. But nobody knows where those prices are going tomorrow or in the next 5 or 10 or 30 years.
It's not likely the Dow will ever go back to 777 -- but I wouldn't risk my life on it, especially not with terrorism, looming conflict with China, and such threats. The U.S. has survived past threats -- that's no guarantee of the future.
Advocates of "value investing" often speak of how stocks can be undervalued now but the market will reward good companies in the "long run." I've got news for you -- there is no "long run." Stock prices are ALWAYS fluctuating.
Many companies traded on the New York Stock Exchange are more than 30 years old. Their prices continue to fluctuate based on the market's current appraisal of their value. 30 years from now, the stock prices of all then-existing companies will also fluctuate based on the market's then-current appraisal of their value.
And those 30 years from now prices could be considered "over" or "under" valued at the time, depending on how you choose to value a stock.
And those 30 years from now prices could be higher but also lower than today's closing price -- without or without adjusting for inflation (which is important, but it's easy to forget about this when oohing and ahhing about how much a stock has gone up over the years.)
stock price lows
stock price lows
Thursday, April 12, 2007
Is inflation under control? Does anybody know?
The #3 Deadly Lies About Money from the ad in Rude Awakening (I mentioned it about a week ago) is "Inflation is under control."
According to that, the "official" inflation rate is 3.8%. If that is true, the value of a U.S. dollar will be cut in half in just 19 years. If you're retiring now at age 65, the value of your savings will be diminished by half, before you're 85. And although that may sound very old and distant, large numbers of people are living to, and beyond, that age.
If you're just starting your work career, 19 years is less than half of the time you'll work before retiring.
It's a favorite theme of investment newsletter salesletters that the official inflation rate is understated by the government. I don't know, not having access to all their information.
And I doubt the real accuracy of the government's information. I remember once when I was still in college. The U.S. dollar was worth more than twice what it is now (though I didn't have nearly as many of them), but inflation was much higher than it is now.
I was working part time at Pizza John's (NOT "Papa" John's!), a local pizza restaurant. After a lunch hour rush, a young woman working for the government came in to ask about price increases to keep track of inflation.
She was young and nice looking so my boss enjoyed talking to her for a few minutes, flirting with her, but when she kept asking him about when it was that they'd last increased prices and whether a potato slice always went with a certain sandwich, I could see him getting bored and impatient, and he just put her off with whatever he felt like saying.
So I'm not convinced the government actually knows what the "true" rate of inflation is.
However, it is the greatest single financial enemy of anyone who's not actively increasing their income.
inflation
inflation
According to that, the "official" inflation rate is 3.8%. If that is true, the value of a U.S. dollar will be cut in half in just 19 years. If you're retiring now at age 65, the value of your savings will be diminished by half, before you're 85. And although that may sound very old and distant, large numbers of people are living to, and beyond, that age.
If you're just starting your work career, 19 years is less than half of the time you'll work before retiring.
It's a favorite theme of investment newsletter salesletters that the official inflation rate is understated by the government. I don't know, not having access to all their information.
And I doubt the real accuracy of the government's information. I remember once when I was still in college. The U.S. dollar was worth more than twice what it is now (though I didn't have nearly as many of them), but inflation was much higher than it is now.
I was working part time at Pizza John's (NOT "Papa" John's!), a local pizza restaurant. After a lunch hour rush, a young woman working for the government came in to ask about price increases to keep track of inflation.
She was young and nice looking so my boss enjoyed talking to her for a few minutes, flirting with her, but when she kept asking him about when it was that they'd last increased prices and whether a potato slice always went with a certain sandwich, I could see him getting bored and impatient, and he just put her off with whatever he felt like saying.
So I'm not convinced the government actually knows what the "true" rate of inflation is.
However, it is the greatest single financial enemy of anyone who's not actively increasing their income.
inflation
inflation
Wednesday, April 11, 2007
Prepare for retirement before it's too late
The #2 Deadly Lies About Money from the ad in Rude Awakening (I mentioned it about a week ago) is "Your retirement is safe." Well, Bernard Bernake new Chairman of the Federal Reserve is trying to sound the alarm, but no politicians are listening. To be fair, President Bush tried to implement reform of Social Security early in 2005 but he was blocked by the expected opposition from the Democratic and pseudo-Republican liberals who refuse to touch the sacred cow of Social Security.
Yet anybody who looks can see the problem coming. There's not going to be enough money in the Social Security trust funds for the baby boomers. Not enough money to pay for Medicare expenses. Not enough pension money in the pension funds.
Even worse, there's just plain not enough money in the world!
And Japan and many European countries have an even worse discrepancy than the USA!
Sooner or later, we're going to see a massive theft of Social Security from the "rich." I say "theft," because Social Security was originally sold the American people and promoted as "insurance," not welfare. The taxation of Social Security for people with incomes over $25,000 which began about 10 years ago was an outrageous violation of this principle which nobody objected to, because hey, who cares if the "rich" (elderly people who make over $25,000 annually) don't like it -- why should they get it if they don't need it? Because they paid for it, that's why.
Just lately the government instituted the Income Related Monthly Adjustment Amount (IRMAA) part of the Medicare Modernization Act of 2003 - which forces elderly people who have over $80,000 in income to pay more of a Medicare Part B premium than other people. Again, class warfare.
And class warfare rhetoric is just beginning. We can expect to see higher Social Security taxes, an increase in the retirement age and more means testing (though it may just be backend taxation) of Social Security benefits.
If you save and invest money, even if it's just in certificates of deposit, you're going to be punished, to pay for the people who didn't save anything. Also watch out for a crackdown on people who have money in bank accounts in other countries. The government will want to get its hands on your money no matter where in the world it is.
baby boomer investing
baby boomer investing
Yet anybody who looks can see the problem coming. There's not going to be enough money in the Social Security trust funds for the baby boomers. Not enough money to pay for Medicare expenses. Not enough pension money in the pension funds.
Even worse, there's just plain not enough money in the world!
And Japan and many European countries have an even worse discrepancy than the USA!
Sooner or later, we're going to see a massive theft of Social Security from the "rich." I say "theft," because Social Security was originally sold the American people and promoted as "insurance," not welfare. The taxation of Social Security for people with incomes over $25,000 which began about 10 years ago was an outrageous violation of this principle which nobody objected to, because hey, who cares if the "rich" (elderly people who make over $25,000 annually) don't like it -- why should they get it if they don't need it? Because they paid for it, that's why.
Just lately the government instituted the Income Related Monthly Adjustment Amount (IRMAA) part of the Medicare Modernization Act of 2003 - which forces elderly people who have over $80,000 in income to pay more of a Medicare Part B premium than other people. Again, class warfare.
And class warfare rhetoric is just beginning. We can expect to see higher Social Security taxes, an increase in the retirement age and more means testing (though it may just be backend taxation) of Social Security benefits.
If you save and invest money, even if it's just in certificates of deposit, you're going to be punished, to pay for the people who didn't save anything. Also watch out for a crackdown on people who have money in bank accounts in other countries. The government will want to get its hands on your money no matter where in the world it is.
baby boomer investing
baby boomer investing
Tuesday, April 10, 2007
HYIP and other investing scams
I hope this doesn't apply to any readers of this blog, but last night I was rereading James Glassman's book THE SECRET CODE OF THE SUPERIOR INVESTOR, and I reflected about his characterization of investors as either outsmarters or partakers. I have certainly been an outsmarter for most of my investing "career," (except for contributing to my retirement fund at work), and I've paid the price.
Outsmarters don't win with the possible exception of when they have enough control to manipulate the results, which could be illegal and certainly is unethical. This may apply in some limited circumstances, but not to the vast majority of us.
At its most extreme, the outsmarter mentality is so out of touch with reality that it makes people susceptible to fraud. If you're going to listen to stock tips on cable TV, why not listen to them from boiler room telephone con artists? If you're going to put your money into overseas hedge funds then why not fall for some other fancy investment in the Virgin Islands.
If you think you really understand how the markets work in the short term, why not day trade? If you think someone else really understands how the markets work, why not send them your money to help you get rich, even if they don't give you any details, as few HYIP scams even try to do?
It's a truism that con artists claim that their cons work only on greedy people who think they can get something for nothing.
I don't know if con artists really claim that, but it does seem to apply. I remember that when I delivered pizza the people who wanted to cash bad checks for more than the cost of the pizza would add a large amount of money to the total as my tip, so I'd accept the check. And the infamous online Nigerian scam certainly also relies on the greed of its victims.
So the same "outsmarting" mentality that leads people to lose money through stock tips, paying brokerage commissions through trading, paying high mutual fund fees, paying even high hedge funds fees, paying interest on the leverage of buying stocks on margin . . . can lead to becoming the victim of out and out scams and frauds.
HYIP and other scams
HYIP and other scams
Outsmarters don't win with the possible exception of when they have enough control to manipulate the results, which could be illegal and certainly is unethical. This may apply in some limited circumstances, but not to the vast majority of us.
At its most extreme, the outsmarter mentality is so out of touch with reality that it makes people susceptible to fraud. If you're going to listen to stock tips on cable TV, why not listen to them from boiler room telephone con artists? If you're going to put your money into overseas hedge funds then why not fall for some other fancy investment in the Virgin Islands.
If you think you really understand how the markets work in the short term, why not day trade? If you think someone else really understands how the markets work, why not send them your money to help you get rich, even if they don't give you any details, as few HYIP scams even try to do?
It's a truism that con artists claim that their cons work only on greedy people who think they can get something for nothing.
I don't know if con artists really claim that, but it does seem to apply. I remember that when I delivered pizza the people who wanted to cash bad checks for more than the cost of the pizza would add a large amount of money to the total as my tip, so I'd accept the check. And the infamous online Nigerian scam certainly also relies on the greed of its victims.
So the same "outsmarting" mentality that leads people to lose money through stock tips, paying brokerage commissions through trading, paying high mutual fund fees, paying even high hedge funds fees, paying interest on the leverage of buying stocks on margin . . . can lead to becoming the victim of out and out scams and frauds.
HYIP and other scams
HYIP and other scams
Sunday, April 8, 2007
The Bond Desk by Neil George
My quest for information on fixed income investments such as bonds led to this report by Neil George. It's selling his newsletter on bonds, which is expensive, so I'm not pushing anybody to subscribe. I wouldn't get anything out of it if you did, and I myself haven't either, but I am curious. What kind of bonds are currently yielding 17%? How much risk is involved? I do appreciate his early words about how wealthy investors don't want their money sitting in mutual funds wasting time -- they want to get paid. That's the whole theme of this blog and my site, getting paid now. It's encouraging to know that the ultra-wealthy share this attitude :)
The Bond Desk report
bonds
bonds
The Bond Desk report
bonds
bonds
Friday, April 6, 2007
$300 million investment in old economy biz
Here's an interesting investing question -- would you risk $300 million of your own money to buy an "old economy" stock with a business that's going downhill thanks to the Internet?
That's what Sam Zell, a real estate mogul, did recently by buying the Tribune Company, owner of the LA Times.
At what point are troubled companies a true "value" investment and when are they low-priced for good reason?
Newspapers are losing readership and advertising dollars to the Internet. This is due to a number of factors -- online news sources are more up to date and convenient. People's demand for local news isn't really great enough to justify an extensive staff of reporters for local news, and they can't afford to send reporters all over the world as in the old days.
I believe that's it's also partly because major newspapers in this countries are secretly aiming to destroy this country, and many intelligent people realize that they're anti-American, though few realize how consciously many newspaper editors and reporters are actively working to bring down freedom and capitalism.
But that's also true of TV journalism, which is not so much on the decline, though I think eventually it will go down the tubes. CNN and Fox will supply all national and international news and the local news teams will cover fires, car crashes and mayor news conferences.
Yet many businesses have been on the decline for years, but still manage to make money, such as railroads. Maybe Zell has a plan to revolutionize the newspaper industry as Nucor did for steel at a time when every other U.S. steel company was losing to competition in Germany, Japan and South Korea.
It can be better to pay a low price for a declining but still viable business than a high price for an expanding business.
declining industry investing
declining industry investing
That's what Sam Zell, a real estate mogul, did recently by buying the Tribune Company, owner of the LA Times.
At what point are troubled companies a true "value" investment and when are they low-priced for good reason?
Newspapers are losing readership and advertising dollars to the Internet. This is due to a number of factors -- online news sources are more up to date and convenient. People's demand for local news isn't really great enough to justify an extensive staff of reporters for local news, and they can't afford to send reporters all over the world as in the old days.
I believe that's it's also partly because major newspapers in this countries are secretly aiming to destroy this country, and many intelligent people realize that they're anti-American, though few realize how consciously many newspaper editors and reporters are actively working to bring down freedom and capitalism.
But that's also true of TV journalism, which is not so much on the decline, though I think eventually it will go down the tubes. CNN and Fox will supply all national and international news and the local news teams will cover fires, car crashes and mayor news conferences.
Yet many businesses have been on the decline for years, but still manage to make money, such as railroads. Maybe Zell has a plan to revolutionize the newspaper industry as Nucor did for steel at a time when every other U.S. steel company was losing to competition in Germany, Japan and South Korea.
It can be better to pay a low price for a declining but still viable business than a high price for an expanding business.
declining industry investing
declining industry investing
Thursday, April 5, 2007
Was Enron truly ever viable?
as Enron ever a viable, long term company? I'm thinking about that because I just read a history of the company from its beginnings as a merger between two oil pipeline companies through the bankruptcy.
At one point early in its history, Enron's top executives decided to make it a modern company, and it expanded enormously. Not just in supplying energy, but in trading it the way Wall Street firms trade options. They even hired some traders from a major bank to come and teach their people how to make trades.
Within a few years, Enron was trading electricity, natural gas, the weather, paper pulp, metals -- almost anything except the sheer paper assets or ordinary exchange-traded commodities which are what we normally think of as "trading." They were making markets in these things, plus financing projects.
The author describes Enron in the nineties as certainly being a very innovative company. They were enormously selective in who they hired, picking only the brightest and most ambitious, and fostered a culture of entrepreneurialism. If you worked for Enron, you had wide freedom to think up your own project and then network among others for support, both financial and material. If you could get the project going, it was yours. If you succeeded you were a hero. If not, try again. The ability to make mistakes and learn from them is attractive. Though it's doubtful that the company as a whole did learn from mistakes, since people came and went so much.
Can a corporation continue indefinitely going hither and thither without any overall purpose or control? There were a few years Enron felt it could trade and profit from any market at all. This also helped lead to losses. Yet they did not enforce trade size limits on their traders, so unless they found truly inefficient markets to trade, there was always substantial risk of overtrading. Always traders to commit you to positions too large is NOT "managing" risk. (Just ask Barings Banks - a hundreds years British institution that allowed one trader in Hong Kong to drive it out of business.)
What lead to their ultimate downfall was applying that mindset of financial manipulations to their own accounting and financial systems. So they "managed" their ever-growing debt as they "managed" risk -- and ultimately couldn't sustain it.
What if a well-managed company positioned to exploit market inefficiencies in energy and with sufficient internal controls and honest, conservative accounting and a long-range vision everybody understands and follows . . . in short, what Enron lacked . . . could they make the same business work?
I don't know, but as an investor I much prefer an "old economy" type of company that sells a well-established and in-demand product or service for a profit. Although I don't think the efficient market hypothesis applies to closed markets such as electricity, I always question the ability of traders to beat the market on a sustained, long term basis.
I suspect that supplying people and businesses with needed and desired goods and services is a better business model.
Enron viability
Enron viability
At one point early in its history, Enron's top executives decided to make it a modern company, and it expanded enormously. Not just in supplying energy, but in trading it the way Wall Street firms trade options. They even hired some traders from a major bank to come and teach their people how to make trades.
Within a few years, Enron was trading electricity, natural gas, the weather, paper pulp, metals -- almost anything except the sheer paper assets or ordinary exchange-traded commodities which are what we normally think of as "trading." They were making markets in these things, plus financing projects.
The author describes Enron in the nineties as certainly being a very innovative company. They were enormously selective in who they hired, picking only the brightest and most ambitious, and fostered a culture of entrepreneurialism. If you worked for Enron, you had wide freedom to think up your own project and then network among others for support, both financial and material. If you could get the project going, it was yours. If you succeeded you were a hero. If not, try again. The ability to make mistakes and learn from them is attractive. Though it's doubtful that the company as a whole did learn from mistakes, since people came and went so much.
Can a corporation continue indefinitely going hither and thither without any overall purpose or control? There were a few years Enron felt it could trade and profit from any market at all. This also helped lead to losses. Yet they did not enforce trade size limits on their traders, so unless they found truly inefficient markets to trade, there was always substantial risk of overtrading. Always traders to commit you to positions too large is NOT "managing" risk. (Just ask Barings Banks - a hundreds years British institution that allowed one trader in Hong Kong to drive it out of business.)
What lead to their ultimate downfall was applying that mindset of financial manipulations to their own accounting and financial systems. So they "managed" their ever-growing debt as they "managed" risk -- and ultimately couldn't sustain it.
What if a well-managed company positioned to exploit market inefficiencies in energy and with sufficient internal controls and honest, conservative accounting and a long-range vision everybody understands and follows . . . in short, what Enron lacked . . . could they make the same business work?
I don't know, but as an investor I much prefer an "old economy" type of company that sells a well-established and in-demand product or service for a profit. Although I don't think the efficient market hypothesis applies to closed markets such as electricity, I always question the ability of traders to beat the market on a sustained, long term basis.
I suspect that supplying people and businesses with needed and desired goods and services is a better business model.
Enron viability
Enron viability
Wednesday, April 4, 2007
Dividend paying stocks more dependable than "earnings"
I got an email today from Schaeffer Research, which is basically Bernard Schaeffer who publishes The Options Advisor, his entry-level option newsletter product, predicting that there're going to be a lot of disappointing earnings announcements in the weeks to come, now that the first quarter has closed out and companies will be providing their net earnings for the first quarter.
And of course he says this will mean a lot of profit opportunity -- he foresees a lot of volatility.
Yet the thrust of the email is bullish, so apparently he think that companies will post earnings that are actually higher than investors expect. So even if they're lower than the last 3 years, they'll be higher than expected, and that means a lot to a lot of traders.
Of course, earnings always go up and down. Plus, earnings is an accounting figure subject to accounting manipulation. Cash flow is a more dependable indicator in many instances, because it can't be manipulated. Either there's money in the bank account or not. The bank doesn't care about appreciation or off the books limited partnerships.
And the best way to evaluate cash flow is to find the companies that continue to increase dividends year after year -- they are more dependable than quarterly earnings statements.
Schaeffer's tracks a put/call ratio, and that's the highest it's been in over 3 years. So stock prices may well go higher, if he's right.
But remember that you can spend dividends and still keep the stocks.
dividend increases
dividend increases
And of course he says this will mean a lot of profit opportunity -- he foresees a lot of volatility.
Yet the thrust of the email is bullish, so apparently he think that companies will post earnings that are actually higher than investors expect. So even if they're lower than the last 3 years, they'll be higher than expected, and that means a lot to a lot of traders.
Of course, earnings always go up and down. Plus, earnings is an accounting figure subject to accounting manipulation. Cash flow is a more dependable indicator in many instances, because it can't be manipulated. Either there's money in the bank account or not. The bank doesn't care about appreciation or off the books limited partnerships.
And the best way to evaluate cash flow is to find the companies that continue to increase dividends year after year -- they are more dependable than quarterly earnings statements.
Schaeffer's tracks a put/call ratio, and that's the highest it's been in over 3 years. So stock prices may well go higher, if he's right.
But remember that you can spend dividends and still keep the stocks.
dividend increases
dividend increases
Tuesday, April 3, 2007
Motley Fool on Alan Abelson
I recently read the book RULE BREAKERS, RULE MAKERS by The Motley Fool, and one part of it I found pretty funny but didn't include in the review I wrote for Ezine Articles is that the Gardners made fun of the editor of BARRON'S, Alan Abelson, for her persistent bearishness. I was reading BARRON'S around that time (the book was written in mid-1998), so I know exactly what they're talking about.
I will put in a disclaimer now that I don't know what the Fool now say about the late 1990s boom. This book is an example of it, since they tout high tech stocks and also say that they ignore Price/Earnings or P/E ratios. I will say that it may be unfair to judge their current advice by what they wrote during the dotcom boom. They were caught up in it, and so were many other people.
Alan Abelson of BARRON'S was never caught up in the dot com boom. He was predicting stock market disaster years before the boom officially began. I don't know what he wrote about the bust of 2001, or what he says about the market now that it's gone past the boom's peak.
But it's also true that if you'd invested according to Abelson instead of The Fool you'd have missed out on the dot com boom -- and also kept your money through the subsequent bust.
To be fair, if you'd bought the company that pays dividends that they recommend -- Coca-Cola -- you'd have been paid a lot of nice quarterly checks. It's their enthusiasm for some high tech stocks that looks like part of the boom mentality now, with the benefit of 2007 hindsight.
Motley Fool on Abelson
Motley Fool on Abelson
I will put in a disclaimer now that I don't know what the Fool now say about the late 1990s boom. This book is an example of it, since they tout high tech stocks and also say that they ignore Price/Earnings or P/E ratios. I will say that it may be unfair to judge their current advice by what they wrote during the dotcom boom. They were caught up in it, and so were many other people.
Alan Abelson of BARRON'S was never caught up in the dot com boom. He was predicting stock market disaster years before the boom officially began. I don't know what he wrote about the bust of 2001, or what he says about the market now that it's gone past the boom's peak.
But it's also true that if you'd invested according to Abelson instead of The Fool you'd have missed out on the dot com boom -- and also kept your money through the subsequent bust.
To be fair, if you'd bought the company that pays dividends that they recommend -- Coca-Cola -- you'd have been paid a lot of nice quarterly checks. It's their enthusiasm for some high tech stocks that looks like part of the boom mentality now, with the benefit of 2007 hindsight.
Motley Fool on Abelson
Motley Fool on Abelson
Monday, April 2, 2007
Investing lesson from Uncle Scrooge McDuck
When investing it's important to keep in mind what about economic activity is real and what is important only if and when it is connected to what's real.
I know that's vague. I'll illustrate with an example of a comic book story I read when I was a little kid.
If you're a comic book fan who knows more than superhero comics, you should know that in the 1950s and 1960s a man named Carl Barks wrote and drew the Donald Duck comic books. Since Disney didn't give credit to its artists, nobody at the time knew his name -- that came out later -- but he was widely known as the "good" artist. His style of drawing is distinctive for its detail and authority. Plus, he wrote a lot of fun and terrific stories -- sending Donald, Uncle Scrooge and Huey, Dewey and Louie to have adventures all over the world.
Anyway, in one story everybody in the world is given a million dollars or some kind of unlimited amount of money (I forget the details).
So everybody in the world decides that since they're rich, they don't have to work anymore. They start taking it easy.
Of course, Donald and his three nephews start to do the same, so they're shocked when Uncle Scrooge McDuck (I wonder if some Scottish civil rights groups would object to Disney giving him a Scottish name, if these comics were to come out today?) makes them start growing food!
They don't understand why their rich uncle says there's going to be a lot of trouble in the world!
Of course, once the world's supply of food and other goods get used up, people start to go hungry. They find that all the money they have is useless when there is no food to be bought.
Of course, the ducks are just fine, since they listened to Uncle Scrooge and worked hard to raise their food.
So Carl Barks through this comic book story gave me an important economics lesson. Money is important, but only when there's food available to buy with it. Somebody has to grow it, harvest it, and distribute it to stores. Or people don't eat.
So this connects with investing -- you make money from giving people what they need and want. All the money in the world won't help you if you can't do that.
Scrooge McDuck investing
Scrooge McDuck investing
I know that's vague. I'll illustrate with an example of a comic book story I read when I was a little kid.
If you're a comic book fan who knows more than superhero comics, you should know that in the 1950s and 1960s a man named Carl Barks wrote and drew the Donald Duck comic books. Since Disney didn't give credit to its artists, nobody at the time knew his name -- that came out later -- but he was widely known as the "good" artist. His style of drawing is distinctive for its detail and authority. Plus, he wrote a lot of fun and terrific stories -- sending Donald, Uncle Scrooge and Huey, Dewey and Louie to have adventures all over the world.
Anyway, in one story everybody in the world is given a million dollars or some kind of unlimited amount of money (I forget the details).
So everybody in the world decides that since they're rich, they don't have to work anymore. They start taking it easy.
Of course, Donald and his three nephews start to do the same, so they're shocked when Uncle Scrooge McDuck (I wonder if some Scottish civil rights groups would object to Disney giving him a Scottish name, if these comics were to come out today?) makes them start growing food!
They don't understand why their rich uncle says there's going to be a lot of trouble in the world!
Of course, once the world's supply of food and other goods get used up, people start to go hungry. They find that all the money they have is useless when there is no food to be bought.
Of course, the ducks are just fine, since they listened to Uncle Scrooge and worked hard to raise their food.
So Carl Barks through this comic book story gave me an important economics lesson. Money is important, but only when there's food available to buy with it. Somebody has to grow it, harvest it, and distribute it to stores. Or people don't eat.
So this connects with investing -- you make money from giving people what they need and want. All the money in the world won't help you if you can't do that.
Scrooge McDuck investing
Scrooge McDuck investing
Sunday, April 1, 2007
7 Deadly Money Lies
As a subscriber to Agora's free ezine, The Rude Awakening, I also get tons of email sales letters for their financial newsletters.
I often enjoy reading these for various reasons. If they're well-researched, they can be quite informative, and give you a lot to think about. I got one recently called the The 7 Deadly Money Lies. You can start to read it here:
7 Deadly Money Lies
Agora mostly takes a hard-money, pro-gold, pro-commodities especially oil, the world is going to hell approach. I've been hearing such arguments since the 1970s when libertarian Harry Browne and some others started popularizing them. They've been right in some ways -- inflation certain has eroded the value of the dollar -- but obviously wrong in others -- the world's economy has not collapsed -- yet.
Maybe it will tomorrow.
Maybe you should just seek the safety of passbook savings accounts although that concept is anathema to both sides.
My own opinion? #1 -- yes, deficits do matter. I don't know if Dick Cheney really believes they don't. But Republicans have been griping about Democratic spending deficits for years, and should continue to try to balance the budget even though we must also fight the war on terror. Because the consequences of losing that would be far greater than the economic problems brought on my the budget deficit.
money lies
money lies
I often enjoy reading these for various reasons. If they're well-researched, they can be quite informative, and give you a lot to think about. I got one recently called the The 7 Deadly Money Lies. You can start to read it here:
7 Deadly Money Lies
Agora mostly takes a hard-money, pro-gold, pro-commodities especially oil, the world is going to hell approach. I've been hearing such arguments since the 1970s when libertarian Harry Browne and some others started popularizing them. They've been right in some ways -- inflation certain has eroded the value of the dollar -- but obviously wrong in others -- the world's economy has not collapsed -- yet.
Maybe it will tomorrow.
Maybe you should just seek the safety of passbook savings accounts although that concept is anathema to both sides.
My own opinion? #1 -- yes, deficits do matter. I don't know if Dick Cheney really believes they don't. But Republicans have been griping about Democratic spending deficits for years, and should continue to try to balance the budget even though we must also fight the war on terror. Because the consequences of losing that would be far greater than the economic problems brought on my the budget deficit.
money lies
money lies
Subscribe to:
Posts (Atom)